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Fed’s Evans says recent strong inflation readings are not the start of persistent move higher

The recent strong U.S. inflation readings are not the start of a steady move higher in consumer prices, Chicago Fed President Charles Evans said on Tuesday.

“It is important to emphasize that the recent increase in inflation does not appear to be the precursor of a persistent movement to undesirably high levels of inflation,” Evans said, in a speech to a virtual conference sponsored by the Bank of Japan.

Inflation over the year ended in April increased 4.2% as measured by the consumer price index, a pace higher than Wall Street economists were expecting. The data means we’re likely to see a big move up in the April personal consumption expenditure index when it is released on Friday, Evans said.

The Chicago Fed President said that the factors behind this increase are well known – last year’s price declines dropping out of the 12-month outlook, normalizing prices from sectors hard hit by the pandemic and bottlenecks.

“As challenging as they are for certain households and businesses, these
developments largely reflect relative price changes to new equilibrium levels—and
relative price changes by themselves have only transitory effects on inflation,” Evans said.

In his remarks, Evans took aim at many commentators, like former U.S. Treasury Secretary Larry Summers, who have argued that the two fiscal stimulus packages passed by Congress in the past six months were too big and would overheat the economy and that the Fed should pivot away from its easy money policy stance to counter that risk.

Evans said the “precise inflation mechanisms and magnitudes are often left unsaid” in these arguments.

The Chicago Fed staff ran three models on the impact of President Joe Biden’s American Rescue Plan on the economy. In only one model does high inflation persist around 3% and that is under a scenario where households and businesses come to believe higher inflation will last and these expectations get imbedded in inflation.

Evans calls this an “accelerationist view” and seems to be in the minds of many commentators.

He said he thinks the risk of this scenario “is low.” Prior to the pandemic, inflation expectations were well below 2%.

Evans said the Fed would be watching the data closely.

Stocks
DJIA,
+0.02%

SPX,
+0.01%

opened slightly higher on Tuesday and the yield on the 10-year Treasury note
TMUBMUSD10Y,
1.583%

fell below 1.6% as inflation worries eased a bit.

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